Why America Should Spread the Wealth

I know that this idea is disparaged by the people who have the wealth, but the article Why America Should Spread the Wealth by Mark Thoma puts some intellectual backing to the economic utility of the idea.  I’ll quote a few paragraphs to set up the premise.  You’ll have to navigate to the article itself, if you want to read the whole story.

Many economists worry that making societies more equal through income redistribution or other means lowers economic growth. This “big tradeoff” between equality and efficiency, which is supported by comparisons of capitalist and socialist countries, implies that there is a limit to how much redistribution a society should pursue. At some point the tradeoff of more equality for less output – which worsens as we push toward more and more equality – becomes intolerable. However, while the tradeoff is quite unfavorable as we push to extremes, recent experience suggests there is a wide region where the tradeoff is hard to detect. Thus, worries about this tradeoff appear to be overblown.

For example, the Bush tax cuts were justified, in part, by the claim that equity had overshadowed efficiency in tax policy decisions. Taxes on the wealthy and the inefficiencies that come with them were much too high, it was argued, and lowering taxes would cause output to go up enough to lift all boats substantially. Accordingly, the lower end of the income distribution would fare much better after income trickled down than it would under redistributive policy.

The economy did grow after the Bush tax cuts, but the rate of growth was unremarkable, especially for jobs, and there’s little evidence that they caused large increases in output growth as promised. In fact, there’s little evidence that the Bush tax cuts had any effect at all. The tradeoff simply wasn’t there.

And the tax cuts at the upper end of the income distribution did nothing to correct for the fact that although worker productivity was rising, wages remained flat – a problem that began in the mid 1970s. This was an indication that something was amiss in the mechanism that distributes income to different members of society. Workers were helping to increase the size of the pie, but income did not trickle down as promised and their share of the pie was no larger than before.

In all things, and economics especially, when someone proposes a theory that sounds reasonable, you should always ask two questions.

  1. Under what circumstances does this theory make sense (and what circumstances make the theory inappropriate)?
  2. Are the current circumstances the environment where the theory works or is it currently the environment where the theory does not work?

The reason for asking these questions is that the Republicans (and Democrats) frequently come up with theories that on their face seem to make sense. They don’t bother to tell you (if they realize it themselves) that at the current time, the theory is not applicable. Inapplicability has been the case for much of the past 30 years of the Reagan/Bush/Clinton/Bush era. On into the Obama administration, the Republicans are still promoting the theory whose time has passed, but may return sometime in the future.   The more they hang onto it now, the longer it will be before it becomes appropriate again.

The unfortunate part for the hangers on to a theory that is past its prime, is that their tenacity in hanging on when it is inappropriate, makes it harder for them to promote the theory when the circumstances return to the ones that make it appropriate.  (A stopped watch is right twice a day.  However, once  you know it is stopped, you are never going to bother with it again, even though somebody may have put new batteries in it and reset it to the correct time.)

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